Mutual Fund and Hedge Fund

Mutual Fund and Hedge Fund Comparison:

Is one fund more attractive than the other?

Peng Zheng

Han Xu V00

Yang Zhang V00

April 3rd, 2012

Introduction

Mutual fund and Hedge fund are two big players in the fund market. Both funds are growing rapidly. According to Hedge Fund Research (HFR), about $39 billion of assets were controlled by 610 hedge funds; while at the end-of-2006, the number grew to 9000 hedge funds with $1.3 trillion (Bodie 2008). By May 2007, there were 1950 mutual funds with assets of over $710 billion managed by the Investment Funds Institute of Canada (Bodie 2008). At the end of 2010, more than 15,000 mutual funds of all types in the United States with combined assets of $13.1 trillion and $24.7 trillion worldwide (Wikipedia). We do see some differences from these numbers, but we are not clear what on earth the differences between the natures of these two funds are. Is there a superiority of one fund over the other? We are trying to find out the answer through strategies comparison, characteristics comparison and data analysis.

Strategies Comparison

In this section, we will compare hedge funds and mutual funds from the perspective of their strategies. First, let us see the general strategies for hedge funds.

---Short selling

This strategy means selling the securities short without owning them. Hedge fund manager expects that stock prices would drop in the future so they can buy back these securities at lower prices.

---Arbitrage

Generally, there are two types of arbitrages. One is convertible arbitrage and the other is merger arbitrage. For the first one, the company usually has a long position in convertible bonds and keeps a short position for in underlying stocks (Harry 2003). If the company uses the merger arbitrage strategy, hedge fund managers need to buy the target firm's stocks and at the same time sell the acquirer's stocks (Harry 2003).

---Trading options or derivative

This means trading options or derivatives which...